A parameter-free analysis of the utility of money for the general population under prospect theory

Author

Abstract

Extensive data has convincingly demonstrated that expected utility, the reigning economic theory of rational decision making, fails descriptively. This descriptive failure casts doubt on the validity of classical utility measurements. Prospect theory can better explain choice behaviour because it makes the plausible assumption that risk attitudes are not only driven by sensitivity towards outcomes (utility curvature), but also by sensitivity towards probabilities (probability weighting), and by sensitivity towards whether outcomes are above or below a reference point (loss aversion). This paper presents an experiment that completely measures the utility- and loss aversion component of risk attitudes, using a representative sample of NÂ =Â 1935 respondents from the general public, in a parameter-free way. This study thereby provides the first measurement of the utility of money for the general population that is valid under (cumulative) prospect theory, does not depend on prior assumptions about the underlying functional form of utility, is externally valid, and does not rule out heterogeneity of individual preferences. The results confirm the concave-convex pattern of utility as predicted by prospect theory, suggest that utility curvature is less pronounced than suggested by classical utility measurements, and show that women are significantly more loss averse than men.

More about this item

Keywords

Statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:30:y:2009:i:4:p:651-666. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through
the various RePEc services.